Gold is a Misunderstood Metal – Don’t make the Mistake of Ignoring it

A man with his head down on a table and graph behind him that is going down

3. Gold is an awful investment

Gold bugs love it (I wonder how many gold bugs believe in zombies?), and others hate it. The problem with gold as an investment, of course, is that it’s a commodity subject to often volatile and extreme price swings. But there’s a limited supply of the metal, and, as noted above, it can be easily exchanged for cash. That makes it a physical store of wealth with a price driven by investor sentiment. Many people attempt to time the ups and downs of gold. Only in this case, fear will usually drive the price of this precious metal higher.

Last time I checked, market timing was hard to do successfully on a consistent basis. And if that’s what you’re looking at gold for, I’d argue it is likely to be an awful investment. But here’s the thing: fear tends to drive people toward safe haven investments that will retain value in a worst-case scenario. That’s gold, in a nutshell. And, thus, gold tends to do well when other assets (like stocks) are doing poorly.

To put a number on that, during the 2007 to 2009 recession, gold ended the period up around 20%. The SP 500 Index, meanwhile, was lower by about 40%. Clearly, that was a good time to own gold! And for those who don’t recall, there was a real fear at the time that the global financial system was on the verge of collapse.

So, perhaps, the real question isn’t whether or not gold is a good investment, but why you are buying gold in the first place. If you are looking for diversification, or a safe haven, then gold can play a vital role in your portfolio. You should, however, keep the percentage relatively small. On the other hand, if you are trying to time gold’s price swings you’re probably making a mistake.

4. Owning gold miners is better than owning gold

This is a tough one and, like point number one above, the answer can go either way. If you want to own gold in preparation for a worst case scenario (there go those zombies again), then owning gold will be much better than owning stock in a gold miner. And if all you desire is a safe haven investment, then direct purchases of gold are the purest way to achieve that end.

That said, buying a gold exchange traded fund like iShares Gold Trust (NYSEMKT:IAU) would achieve a similar end. This fund’s portfolio consists of gold bars held in London, New York, and Toronto. Thus the fund’s performance generally tracks gold and allows you to avoid the problems of owning physical gold while still getting most of the benefits.

Owning gold miners, however, is a little different. In this case you own a company, such as industry giants Barrick GoldGoldcorp, and Newmont Mining. Since what these companies do is mine for, process, and sell gold, their performance tends to track along with the price of the precious metal. And, along the way, each of these companies pays you a dividend. The yields today are modest, all under 1%, but that’s much better than what you’ll get with physical gold or iShares Gold Trust.

The problem here is that you are subject to the inherent risks of miners. Rising costs can reduce earnings and push down financial results. Meanwhile, aging mines can lead to falling production over time, and new mine developments can prove to be expensive mistakes. There are other problems that might arise, too, but you get the idea. When you buy a gold miner you own a company, and companies can make mistakes.

On the flip side, the shares of gold miners can sometimes move more dramatically than the precious metal itself. That’s particularly true for smaller miners and marginal miners that need high prices to turn a profit. Sometimes a mining stock can double and triple in value when gold goes up much less. Of course, what goes up can also go down, so there are risks here, too. But if you are looking to leverage yourself to gold, then miners are a good bet.

So owning gold versus owning gold miners is, once again, really a question about your goals.

5. Your only investment choices are physical gold or gold miners

Please don’t make the mistake of stopping your search for a gold investment at physical gold (or gold ETFs) and gold miners. There’s one more option you should get to know before you decide how you want to own gold: streaming companies. Some of the biggest names here are Franco-Nevada Corp (NYSE:FNV)Wheaton Precious Metals Corp (NYSE:WPM), and Royal Gold, Inc (NASDAQ:RGLD).

Streaming companies provide cash up front to miners in exchange for the right to buy precious metals in the future at contractually reduced rates. To give you an idea of what that means, Wheaton Precious Metals’ average price for gold is around $400 an ounce — well below current spot prices. The business model affords these companies wide margins even when precious metals prices are low and miners are struggling. In fact, during commodity downturns streaming companies can take advantage of miners in need of cash to ink advantageous streaming deals.

All three pay dividends, with current yields between 1% and 2%. Wheaton’s dividend is tied to the company’s performance, so it will go up and down over time. Royal Gold and Franco-Nevada, however, both have long histories of regular annual dividend increases.

It’s also important to note that these companies aren’t reliant on one or two big mines (like a miner might be); they have investments in a collection of different assets, including operating mines and mines in some phase of development. Franco-Nevada, for example, has its fingers in over 300 assets. So streaming companies are probably best looked at as specialty finance companies with diverse mine investment portfolios.

In many ways, they are a better long-term option than miners. However, they don’t tend to have as much leverage to gold prices. But if you are looking for a gold investment for diversification, they might end up being the best combination of gold exposure, dividends, liquidity, and ease of use. If you are looking at gold, you should take some time to get to know streaming companies like Franco-Nevada, Wheaton Precious Metals, and Royal Gold.

In the end, how you own gold is up to you and related to your personal goals. But once you get past these five myths, you’ll be able to make more informed decisions about the precious metal and its place in your life and, perhaps, in your portfolio. – Reuben Gregg Brewer

 

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